Corning Incorporated: Q3 2012 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company operates in Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Its results are materially influenced by LCD glass pricing and demand, equity earnings from Samsung Corning Precision and Dow Corning, and global industrial and consumer markets.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $2,038 million | $2,075 million | $5,866 million | $6,003 million |
| Gross margin | $879 million; 43% | $978 million; 47% | $2,490 million; 42% | $2,741 million; 46% |
| Operating income | $393 million | $587 million | $1,044 million | $1,471 million |
| Net income attributable to Corning | $521 million | $811 million | $1,445 million | $2,314 million |
| Diluted EPS | $0.35 | $0.51 | $0.95 | $1.46 |
| Equity earnings of affiliates | $240 million | $324 million | $717 million | $1,150 million |
| Operating cash flow | Not separately provided | Not separately provided | $1,966 million | $2,032 million |
- Q3 sales declined 2%, while nine-month sales declined 2% year over year. Net income declined 36% in Q3 and 38% for the nine-month period.
- Gross margin decreased primarily because of lower Display Technologies pricing. Selling, general and administrative expense increased 36% in Q3 and 15% for the nine-month period; research, development and engineering expense increased 11% and 13%, respectively.
- The effective tax rate increased to 14.3% in Q3 from 11.9% and to 16.8% for nine months from 13.0%, primarily reflecting expiration of favorable U.S. tax provisions, partial expiration of Taiwan tax holidays, and changes in earnings mix.
- At September 30, 2012, cash and cash equivalents were $4,952 million and short-term investments were $1,399 million, for total cash, cash equivalents and short-term investments of $6,351 million, compared with $5,825 million at December 31, 2011.
- Total debt was approximately $3,402 million, consisting of $130 million of current debt and $3,272 million of long-term debt, compared with $2,391 million at December 31, 2011. Debt to total capital increased to approximately 13.5% from 10%.
- Working capital was $7,529 million and the current ratio was 4.8:1 at September 30, 2012. Management stated that liquidity was adequate and that the company was in compliance with its debt covenants.
- Nine-month capital expenditures were $1,275 million, compared with $1,666 million in 2011. Management expected full-year 2012 capital spending of $1.8 billion to $1.9 billion, including approximately $900 million for Display Technologies.
Material changes versus the prior comparable period
- Display Technologies net sales declined 6% in Q3 and 11% for nine months; segment net income declined 26% and 34%, respectively. Lower prices, excess glass supply, lower royalty income, and reduced Samsung Corning Precision earnings outweighed higher wholly owned volume.
- Samsung Corning Precision equity earnings declined to $186 million from $229 million in Q3 and to $562 million from $853 million for nine months. Royalty income from that affiliate declined to $20 million from $51 million in Q3 and to $63 million from $176 million for nine months.
- Dow Corning equity earnings declined to $48 million from $89 million in Q3 and to $144 million from $275 million for nine months, primarily due to lower silicone and polycrystalline silicon prices and weaker Hemlock Semiconductor results.
- Specialty Materials was a significant offset: sales increased 21% in Q3 and 13% for nine months, while segment net income increased 55% and 65%, driven principally by Gorilla Glass volume and improved manufacturing efficiency.
- Telecommunications sales declined 7% in Q3 but increased 1% for nine months; segment net income declined 57% and 46%, respectively, due to weaker hardware and equipment sales, higher expenses, and the absence of a prior-year contingent-liability benefit.
- Life Sciences sales increased 1% in Q3 and 4% for nine months following an acquisition, but net income declined 57% and 37% because of acquisition-related operating expenses.
- Operating cash flow remained strong but declined modestly from $2,032 million to $1,966 million, reflecting lower net income and higher pension contributions, partly offset by higher affiliate dividends and working-capital effects.
- Corning issued $750 million of senior unsecured notes in the first quarter of 2012 and repurchased approximately 14.9 million shares for $187 million during Q3. The quarterly dividend was subsequently increased from $0.075 to $0.09 per share effective with the October 3, 2012 declaration.
Guidance, outlook, risks, and unusual items
- Management expected 2012 sales to remain relatively consistent with 2011, with growth in Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences offset by lower Display Technologies sales.
- The estimated 2012 LCD glass retail market was reduced from 3.6 billion to approximately 3.5 billion square feet because of weaker expected personal-computer demand. For Q4, LCD glass volume was expected to be flat to down low single digits sequentially, with price declines slightly higher than in Q3.
- Q4 outlook by segment called for Telecommunications sales to be consistent with Q3, Environmental Technologies sales even to slightly down, Specialty Materials sales consistent with Q3, and Life Sciences sales down approximately 5% due to seasonality.
- Management expected fourth-quarter Dow Corning equity earnings to increase approximately 25% sequentially because a third-quarter deferred-tax-asset adjustment would not recur.
- Corning had agreed to acquire most of Becton, Dickinson’s Discovery Labware unit for approximately $730 million in cash, with closing expected in Q4 2012.
- Material contingencies include an estimated $666 million asbestos litigation liability related to Pittsburgh Corning and non-PCC claims, an unresolved Department of Justice antitrust investigation involving automotive products, and environmental liabilities of approximately $23 million associated with 17 hazardous-waste sites.
- Dow Corning had estimated commercial-creditor liabilities ranging from $89 million to $291 million; Corning could bear 50% of any amount above the recorded minimum, net of applicable tax benefits. Dow Corning also faced Chinese trade investigations involving solar-grade polycrystalline silicon.
- Key operating risks include excess LCD glass capacity, continued pricing pressure, concentrated customers, foreign-exchange volatility, specialized manufacturing capacity concentrated in Asia, potential facility disruptions, customer financial weakness, litigation, regulatory actions, and impairment of long-lived assets or precious-metal equipment.
Investor verification checklist
- Verify the sustainability of Display Technologies pricing, volume, market share, and capacity utilization assumptions.
- Review the performance and distributions of Samsung Corning Precision and Dow Corning, including Hemlock Semiconductor exposure.
- Assess the effect of higher debt, the planned Discovery Labware acquisition, capital spending, share repurchases, and the increased dividend on liquidity.
- Monitor the Department of Justice antitrust investigation and the Pittsburgh Corning asbestos reorganization and liability estimate.
- Evaluate customer concentration, particularly in Display Technologies and Environmental Technologies, and the risk of demand or supply-chain disruptions.
- Confirm fourth-quarter guidance and the extent to which the reported results included unusual items, including the prior-year tax benefit, contingent-liability credit, hedge gains, and affiliate-related adjustments.